Choosing the right retirement plan is one of the highest-leverage tax decisions an agency owner can make. Contributions are tax-deductible, compound tax-deferred, and the right plan can shelter tens of thousands of dollars from the IRS every year. Key takeaways:
Most agency owners spend considerable energy optimizing pricing, managing cash flow, and structuring their entity. Retirement planning tends to get pushed to "later." The cost of that delay is real.
An agency owner earning $180,000 who delays setting up a retirement plan for three years could miss out on roughly $50,000 per year in deductible contributions (the exact amount varies by entity type and W-2 wages) — potentially $45,000 or more in avoidable taxes over that period at a 30% effective rate, before factoring in lost compounding growth. The plan itself is often straightforward to establish. What costs owners money is simply waiting.
For agencies structured as S corps or pass-through entities, retirement plans serve a dual purpose: they build long-term wealth and reduce taxable income in the current year. The right plan depends on your entity type, whether you have employees, how much you want to contribute, and how much administrative complexity you're comfortable managing.
| Plan | 2026 Employee Limit | 2026 Employer Limit | Combined Max | Catch-Up (50+) | Employees Allowed? |
|---|---|---|---|---|---|
| SEP IRA | None | 25% of W-2 comp | $72,000 | None | Yes (uniform %) |
| Solo 401(k) | $24,500 | 25% of W-2 comp | $72,000 | $8,000 ($11,250 ages 60–63) | No (spouse only) |
| SIMPLE IRA | $17,000–$18,100* | 2% non-elective or up to 3% match (no hard dollar cap) | Employee deferral + mandatory employer contribution† | $4,000‡ ($5,250 ages 60–63) | Yes (up to 100) |
*$18,100 for employers with 25 or fewer employees under SECURE 2.0
†Example: An owner deferring $17,000 with a 3% employer match on $180,000 in compensation would see a combined total of roughly $22,400
‡Some applicable SIMPLE IRA plans: $3,850. Consult your plan documents.
For the full schedule of 2026 limits, see IRS Notice 2025-67.
The SEP IRA is one of the easiest retirement plans to establish and maintain. There are no annual filing requirements, no employee deferrals to track, and contributions can be made up to your business tax return deadline, giving you the flexibility to decide how much to contribute after the year ends.
For solo agency owners or sole proprietors that have a high level of income, that simplicity is genuinely valuable. The trade-offs are worth understanding, though.
The income math. For S corp owners, reaching the $72,000 SEP IRA maximum requires at least $288,000 in W-2 wages (up to 25% of compensation, not including distributions). For sole proprietors, the effective rate is closer to 20% of net self-employment income after adjustments. Either way, a Solo 401(k) owner at the same salary can typically contribute considerably more, because the employee deferral component is a fixed dollar amount — not a percentage of pay.
The employee problem. If you have employees, every eligible employee must receive the same contribution percentage as you. Contribute 20% of your own compensation, and you must contribute 20% of each eligible employee's compensation as well. That obligation scales quickly.
The Backdoor Roth interaction. Higher-income agency owners who pursue a Backdoor Roth IRA strategy should know that SEP IRA balances are subject to the pro-rata rule, which can significantly reduce the tax efficiency of that approach. The Solo 401(k) avoids this issue — 401(k) balances are not aggregated under the pro-rata rule.
Understanding these trade-offs, and the impact they have on your personal financial situation, is an important issue, and probably not one you should undertake alone. Talk to a CPA who understands agencies and get the professional guidance you need to figure out the best plan for you and your employees.
For agency owners operating as an S corporation without eligible common-law employees other than a spouse, the Solo 401(k) offers several structural advantages worth understanding, although there are also some real limitations.
The contribution math. At a $100,000 W-2 salary, a SEP IRA limits your contribution to $25,000. A Solo 401(k) at the same salary allows $24,500 as the employee plus $25,000 as the employer — a combined $49,500. For owners over 50, add another $8,000 catch-up, or $11,250 for those ages 60–63.
Limitations with S corp salaries. Many S corp owners deliberately keep W-2 wages lower to reduce payroll taxes. The Solo 401(k)'s employer contribution is still capped at 25% of those wages, so retirement contributions and reasonable compensation requirements need to be optimized together — not in isolation. This is a planning decision worth working through with your CPA before setting your annual salary.
Roth options. The Solo 401(k) supports both traditional (pre-tax) and Roth (after-tax) deferrals. One 2026 update worth knowing: plan participants whose prior-year wages exceeded the IRS threshold (indexed; $150,000 for 2025) are now required to make catch-up contributions on a Roth basis under SECURE 2.0. This doesn't change how much you can contribute — only the tax treatment of the catch-up portion. Confirm your plan document supports Roth catch-up contributions before making year-end decisions.
Other limitations. The Solo 401(k) requires a formal plan document, which adds modest setup cost and ongoing administrative responsibility compared to a SEP IRA. Plans with more than $250,000 in assets must file Form 5500-EZ annually. Most modern plan providers handle this automatically, but it's a compliance obligation to stay current on. Once you hire an eligible common-law employee, the Solo 401(k) is no longer available and must be amended or replaced with a standard 401(k) plan. The plan must also be established by December 31 of the tax year to allow employee deferrals, though employer contributions can follow up to the tax return deadline.
For owners earning $300,000 or more who want to shelter beyond the $72,000 annual limit, defined benefit and cash balance plans may allow significantly higher annual contributions — a strategy worth exploring with your advisor as income grows.
💡 Key Insight: At typical agency owner salary levels, the Solo 401(k) regularly allows $15,000–$25,000 more in annual deductible contributions than a SEP IRA. For an owner in the 32% bracket, that difference translates to $5,000–$8,000 in real tax savings per year. The plan document requirement and annual filing obligation do create additional costs, but these are typically modest relative to that advantage — particularly for owners also pursuing a Backdoor Roth, where the Solo 401(k) provides a structural benefit the SEP IRA cannot match.
For agency owners with a small team, the SIMPLE IRA offers a structured, lower-cost path to providing a retirement benefit without the full complexity of a 401(k). It's available to businesses with 100 or fewer employees and can be established relatively quickly.
Employees can defer up to $17,000 in 2026 ($18,100 at agencies with 25 or fewer employees under SECURE 2.0). The employer must contribute either a dollar-for-dollar match up to 3% of employee compensation, or a non-elective 2% contribution for all eligible employees — regardless of whether those employees participate themselves. SIMPLE IRA contributions vest immediately, which can support retention.
The trade-offs: mandatory employer contributions mean budgeting for this expense in any year the plan is active, and the total contribution ceiling is lower than either the SEP IRA or Solo 401(k). Agencies expecting significant team growth may find the SIMPLE IRA a practical transitional plan before moving to a full 401(k) structure.
If the above explanations have left your head spinning, the breakdown below might be more helpful. Retirement planning as an agency owner is complicated, which is why it's always advisable to consult with experienced professionals. That said, the following rules are typically a good starting point when deciding on the best fit for your situation:
No employees, S corp structure. The Solo 401(k) is typically the best fit — higher contribution potential at lower salary levels, Roth option, and meaningful catch-up contributions for owners 50 and older. Factor in your W-2 salary strategy before setting contribution targets.
No employees, sole proprietor or single-member LLC. Either the SEP IRA or Solo 401(k) can work well. The SEP IRA is simpler to administer; the Solo 401(k) provides more flexibility and, for most income levels below $288,000, allows higher contributions. If you're pursuing a Backdoor Roth IRA, the Solo 401(k) is the stronger choice.
Small team, under 25 employees. Compare the SIMPLE IRA against a full 401(k) based on your budget for employer contributions and your goals for the employee benefit. The SEP IRA is an option if you're comfortable with uniform contribution percentages across all eligible staff.
Planning to hire soon. Factor that timeline into your plan selection now. Adding eligible common-law employees ends Solo 401(k) eligibility and requires transitioning to a different plan structure — ideally one you've planned for rather than one that catches you off-guard.
💡 Key Insight: The right retirement plan today may not be the right plan in two years. Agency owners who revisit this decision annually — especially around entity changes, hiring decisions, or significant income shifts — consistently capture more value from the options available to them.
Selecting a retirement plan is a tax planning decision as much as a financial one. How much you pay yourself, how your entity is structured, and how much income you want to shelter all interact — and the wrong plan, or no plan at all, compounds into real money over time.
At Iota Finance, we help agency owners integrate retirement planning into their overall tax strategy. Whether you're setting up your first plan, evaluating a switch from a SEP IRA to a Solo 401(k), or approaching your first hire and figuring out what comes next, we help you make the decision with full visibility into the numbers.
Related: Beyond Tax Deductions: The Tax Moves That Save Marketing Agencies Real Money
If you're not maximizing your agency retirement plan, you may be overpaying taxes. Book a free 30-minute call and we'll map your maximum deductible contribution and the W-2 salary needed to support it.
Disclaimer: This article reflects the regulatory environment as of early 2026 and is for informational purposes only. Retirement plan rules are complex and fact-specific. For personalized guidance tailored to your business structure and goals, contact Iota Finance.